Opening your own café or restaurant is a super exciting business venture, but when it comes to things like registering for VAT, we understand it can take the joy out of being a business owner.

Not to mention it can feel like a guessing game – does a chocolate covered biscuit need VAT added to it? Or is it the plain ones? Does a Jaffa Cake count as a cake for VAT purposes? (We’ll answer this one straight away, yes!)

This blog looks at what VAT is, and when you need to add it to your yummy goods.

What is VAT?

VAT (which stands for value-added-tax) is a consumption tax which almost all of us have paid at some point. It’s added onto the majority of goods and services sold by VAT-registered businesses.

Who needs to be registered for VAT?

Whether or not your business must register for VAT boils down to your circumstances. You’ll need to become VAT registered if:

• Your taxable turnover in any rolling 12-month period reaches the VAT threshold of £90,000
• You expect your taxable turnover will exceed the VAT threshold within the next 30 days
• You or your business are based outside the UK and you supply goods or services to the UK (or expect to within the next 30 days); regardless of whether you hit the VAT threshold you must register.

You can voluntarily register for VAT, but it depends on your business’ personal circumstances and finances whether or not that would be beneficial.

Voluntarily registering for VAT – is it worth it?

If you own a café or restaurant, you have the option of voluntarily registering for VAT. This can be good if you believe you’ll reach the VAT threshold at some point, because you’ll have adjusted your prices and eased into being VAT-registered earlier.

It also means you’re able to reclaim VAT on any business-related purchases if you pay more in VAT than what you’ve charged to customers in the same time period. This can help your business be more tax efficient if the things your business usually buys are subject to VAT, but the things you sell are not.

Volunteering for VAT does come with its considerations though. For example, if the majority of your suppliers aren’t VAT-registered, you won’t have any VAT to claim back on your purchases even though you’re collecting VAT from your customers – so you may end up with a VAT bill instead!
 

How does VAT work for cafes?

There are different rates of VAT that VAT-registered businesses must charge depending on the goods and services they supply. Generally speaking, most of the goods sold in a café fall under two categories. Standard rate VAT, which is 20%, and zero-rated VAT which, you guessed it, is 0%.

A big indicator as to how much VAT needs to be added is whether your customers decide to eat in, or take their food and drinks to go.

For customers who choose to eat in, whether that be inside or out (including any area provided by the establishment), the VAT rate on all food and drink will be charged at the standard rate. This includes items such as cakes, plain biscuits (not chocolate covered), and cold sandwiches or wraps that would otherwise be zero-rated if they were sold to take out.

How much VAT do I charge if I run a restaurant?

Restaurants and pubs have similar rules to cafes, but because in most instances customers will be eating within the premises, the majority of things sold will fall under the standard-rate tax bracket of 20%. You can find a list of goods and their rates on the GOV website, but make sure you have a chat with your accountant too!

Is it different for the takeaway service I provide?

There’s a lot more depth to takeaway food and drink when it comes to VAT, so please bear with us as we get down to the nitty-gritty of it!

First things first – food preparation. If the type of food you sell isn’t ready for immediate consumption, and it requires your customers to assemble or reheat the food, it’s most likely classed as zero-rated. In instances like this, you must leave clear instructions on how to reheat the food, or how long they need to wait in order to consume it. Always speak to your accountant if you’re confused, as many things will automatically qualify as zero-rated!

Hot food and drink

If the food is considered ‘hot’ for VAT purposes, then you’ll apply the standard rate of VAT. But what counts as ‘hot’? HMRC will look at things like:

• Is it intended to be consumed whilst hot? For example, burger and chips, or a latte. If the answer is yes, you’ll need to add the standard rate of VAT.
• What is the temperature of the goods? If it exceeds room temperature, it’s classed as ‘hot.’
• Has your customer asked for it to be heated? Any request like this, even for food that is usually sold cold, would now be considered as ‘hot’.
• Are you using equipment such as insulated packaging to keep it warm? If yes, it’s classed as ‘hot’.
• Do you advertise it as hot? For instance, do you have labels that say, ‘freshly baked’?

Cold food and drink

In most cases, cold food and drink to take away falls into the zero-rated category. Think popular takeaway items like sandwiches, cold pastries and fresh fruit. But like anything, there are exceptions.

Regardless of whether they are eaten in your establishment or not, things such as the following all fall under standard-rate VAT:

• Ice cream
• Chocolates (as well as chocolate covered biscuits)
• Sweets
• Fruit juices
• Bottled water

There’s a bit of a grey area from time to time, though. For instance, you could be confused if you sell cooked pasties that are originally warm when cooked but cool down through the day and are often served cold.

Any items that haven’t been kept warm after they’ve been cooked and aren’t advertised as hot should fall under the zero-rated category. But if you were to keep the pastries warm in a heated cabinet, they are likely subjected to 20% VAT.

What are my responsibilities as a VAT registered business?

If you’re VAT registered, you’ll need to:

• Ensure you charge the correct amount of VAT to your customers, and record this information
• Keep records of the VAT you pay to other businesses
• Report everything to HMRC in your VAT return so they can determine your VAT bill or refund (this is usually every 3 months but the frequency might vary – it depends on your VAT scheme)
• If you need to pay the difference, pay the bill you owe to HMRC

This can be complex, so do speak to your accountant if you’re struggling, or appoint an agent!

 
Need help with VAT? Give us a call on 020 3355 4047 or get an instant online quote.